Tuesday, June 23, 2009

Wholesale Ice Oligopoly

For me the most interesting market model is called oligopoly, and as an economist I get very excited by how oligopoly theory is able to explain a variety of business situations. One of the problems is that typically there are very few well-known markets that I can turn to as an example that fits the basic model. That does not mean there are none. In fact, depending on the firms geographic market - we observe oligopolies all over the competitive landscape - but to do that, those firms must have regional or local geographic markets. Nationally, oligopolies tend to be much fewer, which is why when I find one that is also producing a product or service that is recognizable by most students, I like to use it as an example; and wholesale ice fits this excellently.

The wholesale ice market is made up of three firms, Arctic Glacier, Home City Ice and Reddy Ice. Given there are only three firms, economic theory tells us that collusive agreements are more likely to occur, and Marketplace reported that these three firms were under investigation for price fixing and dividing up the US market to limit competition and charge artificially higher prices. So consistent with theory we see that collusion is possible in oligopolistic markets as opposed to competitive markets, and we have an example that naturally drops out of the game theory models of oligopoly that are presented in some of my economics courses.

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